Economic Methodology and the Economic Problem

Question 1

economic agents

Answer 1

individuals
governments
businesses
organisations

Question 2

use of economic agents

Answer 2

they are used to organise how resources are allocated between competing uses in attempt to solve the economic problem

Question 3

economic problem

Answer 3

limited (scarce) resources (FOP) and unlimited wants

Question 4

factors of production

Answer 4

capital
land
labour
enterprise

Question 5

capital

Answer 5

man made aids to production (e.g. computers)

Question 6

land

Answer 6

natural resources (e.g. farmland or sheep)

Question 7

labour

Answer 7

human resources (e.g. workers)

Question 8

enterprise

Answer 8

innovation to make profit

Question 9

economic choices

Answer 9

what to produce, (fm; business choice)
how to produce, (fm; business choice)
whom to produce for (fm; who can afford)

Question 10

opportunity cost

Answer 10

the cost of the next best alternative foregone when a choice is made (e.g. doing homework or having fun)

Question 11

how to use opportunity cost to diagnose misallocation

Answer 11

if value of opportunity cost > the choice made = misallocation

Question 12

production possibility frontiers show

Answer 12

OPPORTUNITY COSTS and EFFICIENCY shown on curve

–maximum level of production– of 2 goods or services within given factors of production (e.g. computers or textbooks CAN be produce in 1 day)
the various combinations of the 2 goods with the given factors of production (e.g. 9 computers and 10 books, or 60 books and 5 computers)

Question 13

how does ppf show opportunity cost

Answer 13

the curve on the graph shows the maximum level of output with given factors of production at any ratio of production, showing the opportunity cost

Question 14

how does ppf show efficiency

Answer 14

efficiency is show on the graph as it shows if current production is matching production possibility, which it will when production is efficient

Question 15

ppf in the long run

Answer 15

ppf curves can be shifted outwards in the long run with an increase (quantity or quality) in the factors of production

(ppf = lras)

Question 16

demand

Answer 16

the quantity of a good consumers are willing and able to buy at a given point in time

Question 17

LAW OF DEMAND

Answer 17

there is an inverse relationship between price and demand. as price increases, quantity of demand will decrease and vice versa assuming ceteris paribus

Question 18

CETERIS PARIBUS

Answer 18

assuming everything stays equal besides the independent + dependant variable

Question 19

INCOME EFFECT

Answer 19

when price goes up consumers income can’t stretch as far, meaning consumers are less able to consume at the same quantity, or for luxury goods less willing

Question 20

SUBSTITUTION EFFECT

Answer 20

as our price increases, competitors goods or services become more price competitive, so consumers switch demand to competition

Question 21

why does price and demand have an inverse relationship

Answer 21

due to income and substitution effect

Question 22

FACTORS AFFECTING DEMAND (non price)

Answer 22

population
advertising
substitutes price
income
fashion/trends
interest rates
complements price

Question 23

acronym for non price factors that affect demand

Answer 23

paSific

Question 24

what happens when non price factors effect demand (on diagram)

Answer 24

shifts of the demand curve

Question 25

what happens when price factors effect demand (on diagram)

Answer 25

shifts along the demand curve

Question 26

supply

Answer 26

THE QUANTITY OF A GIVEN GOOD PRODUCERS ARE WILLING AND ABLE TO SUPPLY AT A CERTAIN PRICE IN A GIVEN TIME PERIOD

Question 27

LAW OF SUPPLY

Answer 27

there is a direct relationship/positive relationship between supply and price, if price increases so does supply and vice versa assuming ceteris paribus due to the profit motive for firms

Question 28

relationship of cost of production and supply/price

Answer 28

when quantity supplied goes up, so does costs of production which is why they have a positive relationship with price, firms are not willing or able to supply more (therefore pay increased costs of production) without an increase in price, giving them more / enough profit to cover the costs

Question 29

non price factors affecting supply

Answer 29

productivity (output rate) indirect tax no of firms technology subsidy weather costs of production

Question 30

acronym for non price factors affecting supply

Answer 30

pints w co PINTSWC

Question 31

COSTS OF PRODUCTION factors

Answer 31

transport labour oil raw materials regulation utilities government regulation (e.g. health and safety features)

Question 32

market

Answer 32

any place where buyers meet sellers to exchange goods and / or services

Question 33

equilibrium

Answer 33

where supply = demand in a market the market is cleared of excess supply or demand

Question 34

disequilibrium in a free market

Answer 34

IN A FREE MARKET disequilibrium will never last, because of the factors of the price mechanism

Question 35

how diseqilibrium self corrects in the free market

Answer 35

allocates scarce resources rations excess supply or demand signals price is too low or high incentive to change price to increase profit

Question 36

argument for no government intervention regarding equilibrium

Answer 36

in real world (not just theory) it may take many alterations of price to achieve equilibrium, but will still happen in the free market without government intervention

Question 37

joint demand

Answer 37

complement goods are goods that are often bought together, i.e. razors and the blades or coffee machines and capsules for them the price of one good inversely impacts the demand for the other

Question 38

substitute goods

Answer 38

usually products that are very similar to each other such as coke and pepsi or walkers and max the price on one good positively affects demand for the other, as it is used as a substitute

Question 39

derived demand

Answer 39

the demand for a product or service that is based on the demand for another related product or service. (the demand for something that's needed to produce or provide something else)

Question 40

composite demand

Answer 40

when goods or services have more than one use so that an increase in the demand for one product leads to a fall in supply of the other. (E.g. milk which can be used for cheese, yoghurts, cream, butter and other products.)

Question 41

composite demand products relationships with each other

Answer 41

if demand for one increases (e.g. yoghurt) then less supply of the other will decrease (e.g. cheese)

Question 42

joint supply

Answer 42

the production of one good automatically results in the production of another, related good, even if the two aren't directly related in their final use (e.g. beef and leather)

Question 43

joint supply products relationships with each other

Answer 43

positive affect on each others supply if ones supply increase, so does the others if ones demand increases, so does the others supply